Investors wary of Mexico’s new president’s plans for oil

The revamped Nafta deal has raised the prospect of investment picking up again in Mexico, but foreign investors remain wary of the incoming president’s proposed policies and will be closely watching his plans for the country’s oil sector.

The newly-minted United States-Mexico-Canada Agreement (USMCA), agreed earlier this week, has helped to soothe trade tensions between the longtime strategic allies and eased investor concerns about the Mexican economy.

“The agreement removes a major risk,” said Jorge Mariscal, the chief investment officer for emerging markets at UBS Wealth Management. “It sets the rules of the game and injects an important source of stability that will bring back confidence.”

Receive 4 weeks of unlimited digital access to the Financial Times for just $1.

With trade concerns now ebbing, investors have shifted their attention to another potential hazard: president-elect Andrés Manuel López Obrador. He will take office in December following his landslide victory against Mexico’s political establishment.

While Mr. López Obrador has somewhat moderated his leftwing, nationalist stance, vowing to adhere to fiscal prudence and respect the central bank’s independence, many investors are concerned about what he could do with such a decisive political mandate.

“He believes the public sector should have a strong hand in the economy and distrusts the private sector’s ability to do business in a fair and clean way,” said Kim Catechis, a portfolio manager at Martin Currie, a Legg Mason affiliate. “He’s also a man who has very high convictions in himself, his ability and his policy. You put all that together and you see a higher perception of risk in Mexico.”

Michael Gomez, head of emerging markets at Pimco, sees the energy sector as Mr. López Obrador’s “litmus test.” Investors have long cheered outgoing President Enrique Peña Nieto’s landmark reform in 2013 to reverse a 75-year history of state ownership and allow foreign and private investment in the oil, gas and electricity industries.

Following Mr. Nieto’s opening-up, the country received more than $220bn in commitments, according to Duncan Wood of the Washington-based Wilson Center. Moreover, the 107 contracts the government awarded to nearly 70 companies globally are expected to generate more than $160bn in investment.

Investors have reason to be skeptical about how Mr. López Obrador will proceed. In former presidential runs, he has made his opposition clear. More recently, he has announced plans to inject $4bn in the debt-riddled, state oil company Pemex to expand exploration, construct a new refinery and in two years, boost crude production by a third to 2.5m b/d — a level last reached in 2004. While the incoming president assured private industry executives that their existing energy contracts will be honored, he has placed new auctions on hold until 2019.

At a time when oil prices sit near four-year highs, Henry Peabody, a portfolio manager at Eaton Vance, believes outside investment is critical. “Pemex on its own in a vacuum is not an efficient operator in the energy space,” he said. “It needs expertise and capital, which the private sector can provide.”

Mr. López Obrador’s penchant for referendums adds to concerns. To determine whether or not construction on Mexico City’s new $13bn international airport should proceed, the president-elect has called for a “public consultation,” whereby citizens vote on the plans.

According to Axel Christensen, BlackRock’s chief investment strategist for Latin America and Iberia, this tactic sets a dangerous precedent. “He is building a new framework for how things are debated and decided, and bypassing Congress to consult a public that lacks proper technical research sends a very negative signal.”

On the fiscal front, Mr. López Obrador faces another challenge. He has promised to boost infrastructure spending, raise pensions, and subsidize farmers, all the while balancing the budget without raising taxes. His administration plans to do so by slashing public servants’ salaries, spending more efficiently and clamping down on corruption — measures some officials have already started to row back.

To Alberto Ramos, an economist at Goldman Sachs, it is naive. “How much money can you save by cutting in half the salaries of administrators and secretaries? It’s peanuts,” he said. “And even if eliminating corruption is possible, what do you get? A few percentage points of GDP?”

Mexico’s economy is on track to post a primary surplus of 0.8 percent of gross domestic product by year-end, with public debt levels stabilizing at about 45 percent of GDP, according to Oxford Economics. Private consumption has rebounded along with the peso, which has gained nearly 10 percent against the dollar since plunging in June. Inflation expectations are also falling given the central bank’s tightening cycle that has seen interest rates tick up to 7.75 percent.

For now, markets are giving Mr. López Obrador the benefit of the doubt, said Mario Castro at Nomura. “The real test comes when difficult times arise.”

Those times may not be far off. Mexico is not only a proxy for emerging markets, but it is very exposed to the US economy. There are already signs there that the fiscal boost from tax cuts and government spending has begun to wear off.

Investors wary of Mexico’s new president’s plans for oil2018-10-062018-10-06https://www.worldusnews.com/wp-content/worldusnews-logo-min.pngWorld US Newshttps://www.worldusnews.com/wp-content/uploads/2018/10/investors-wary-of-mexicos-new-presidents-plans-for-oil.jpeg200px200px